Accrual and Cash Basis Accounting
Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. Describe both bases of accounting and explain the differences.
Cash basis is used mostly by small businesses where owners and creditors want a simple way to understand the financial statements. Cash basis is used when a company or creditors does not worry about the accuracy of the statements but just want to understand if there is profit or loss in the company. Revenues are recorded when cash is received and expenses are recorded when cash is payment. Cash basis does not meet the requirements of accounting principles (GAAP) for it does not recognize the revenue principle and matching principle.
Accrual basis accounting method is recognized when revenue is earned, and expenses accrued. Other accounts have to be created to show the difference between and recognized revenue or expenses and the receipt of cash when disburse.
Accrual basis accounting is used by the large businesses in the United States, Canada, and in most foreign countries for the statements is prepared according to the generally accepted accounting principle (GAAP). Most businesses use the accrual statements like the GAAP to get loans from banks and get a better focus on the company’s business for the future.
So the accrual accounting is necessary for small companies and a private company that what to focus on their outlook for the future. Some company’s prefers not to use the accrual basis for it is costly and some do use it for it shows the loss and profit of the company.